Smith v. Barner

¶11. It is very apparent that this case was tried in the Circuit Court on the theory that the note in question was a negotiable instrument, and was indorsed in writing by the defendant “without recourse.” The complaint alleges that the defendant “by a written transfer and assignment sold, assigned, and delivered to the plaintiff a certain promissory note in writing executed on the eighteenth day of August, 1913, for value received, by Frank H. Green-man and Olive E. Greenman, his wife, to B. B. Burner. ” The note is not pleaded in haec verba, and the allegation quoted is not equivalent to saying that it was a negotiable instrument or that it was indorsed “without recourse.” The answer admits that the “defendant transferred the said note without recourse to himself.” That is not an admission that it was indorsed “without recourse.”

¶22.The writer was under the impression that in the original argument here it was conceded by appellant’s counsel that the note was negotiable and that it was indorsed “without recourse” in writing. On reargument counsel for defendant disclaimed any such admission and advised this court that he stood on his legal rights as they appeared ifrom the pleadings. The distinction is important. For failure to make such allegations in the complaint, and in the absence *495of such admission, the case would not come within the terms and provisions of the Negotiable Instruments Act (Section 5898, et seq., L. O. L.), or the legal effect of an implied warranty as therein defined; and for such reason the demurrer to the defendant’s further and separate answer should have been overruled.

¶3The defendant cites and relies upon Carroll v. Nodine, 41 Or. 412 (69 Pac. 51, 93 Am. St. Rep. 743), where it was held:

“An indorsement without recourse is not a contract, but merely operates to transfer the title; and hence parol evidence is admissible, to show that at the time of the transfer of a note by indorsement without recourse the buyer agreed to take the paper at his own risk, absolutely relieving the indorser even from the implied warranty of genuineness attending such a transfer.”

¶4That decision was founded upon a cause of action which arose before the negotiable instruments law was enacted and under the law-merchant as it then existed, and it is alleged in the answer:

“That at the time the defendant sold and indorsed the note to plaintiff, he was fully informed of all matters concerning the credit made thereon of date October 26, 1893, and that the same was a valid and genuine payment; that he then guaranteed that she should never at any time be held liable upon said note in any capacity, or for any part thereof; and that her indorsement of said note without recourse would, and in fact did, forever relieve and protect her from all liability thereon.”

¶53. As we construe Section 5898, L. O. L., there is a vital distinction between the defenses which may be pleaded to an action upon a negotiable promissory note where the title passes by delivery and where it is *496acquired by indorsement “without recourse.” When it is transferred by delivery only, the transaction rests in parol, and a defense in parol may then be made. Under the negotiable instruments law, when such a note is indorsed “without recourse,” it then becomes and is a written contract. The statutory terms and provisions are incorporated in and made a part thereof, and parol evidence is not admissible to explain or vary the written indorsement.

¶6The case is reversed and remanded, with leave to each party to apply to the Circuit Court to file amended pleadings. Reversed and Remanded.

¶7(Concurring in Result). — I concur in the result reached by Mr. Justice Johns in his opinion that this cause must be reversed.

¶8There is absolutely no allegation in the complaint that the paper was made payable to order, or to bearer, or was negotiable in any way. Neither is there any allegation that the transfer by the defendant to the plaintiff was by indorsement on the back of the note. For all that appears, it may have been transferred -by a separate and distinct paper, in which event it would not be a transfer within the negotiable instruments law. Therefore, it is clear that in the condition of the pleadings the judgment on the demurrer to the answer cannot stand.

¶9But I cannot concur in what is said in the opinion as to the construction of Section 5898, L. O. L., or in the conclusion reached that the implied warranty mentioned in that section, applies when the indorsee has full knowledge of the entire facts, and agrees, either expressly or impliedly, that he will take his chances on “the defective title.

¶10*497In my judgment, such a construction was never contemplated by the legislative mind, and will work a gross fraud and injustice, not only in this case (if it shall turn out that there was such an understanding), but in a multitude of other cases where paper of this kind is transferred on speculation with full knowledge of the facts, and with the agreement and understanding- that there is no warranty, and that the purchaser takes his chances. Such a construction of the section malíes the law a pernicious trap to catch even the wary — to say nothing- of the unwary.

¶11No business man would suppose that by simply assigning a note and putting his name under the words “without recourse,” he was signing a written cantract for recourse, and a written contract which would absolutely shut him out from showing what was the real understanding and agreement. Such a construction puts the purchaser in bad faith and with full notice, upon exactly the same plane with the purchaser in good faith and in due course without notice —a proposition which is abhorrent to the whole spirit of the Negotiable Instruments Act.

¶12An indorsement “without recourse” was never considered such a written contract, and. the implied warranties thereunder were always subject to parol evidence of the real agreement of the parties at common law and by the law-merchant.

¶13“The implied warranty is necessarily founded in good faith, and it will not attach except where the party relying upon such warranty has acted in good faith”: 8 C. J., p. 393, § 579.

¶14To same effect see Id., § 578.

¶15“The contract of sale or transfer … may be made in such form, or under such circumstances as to exclude the warranty of genuineness, which would *498be otherwise implied by law. This has been held by repeated decisions”: Id. § 579.

¶16Warranty in the sale of commercial paper runs only ito the holder in due course: Bruck v. Lambeck, 63 Misc. Rep. 117, (118 N. Y. Supp. 494); James v. Yeager, 86 Cal. 184 (24 Pac. 1005).

¶17Knowledge of the facts rebuts warranty: Moore v. Worthington, 63 Ky. (2 Duv.) 307.

¶18If at the time of sale the seller expressly refuses to warrant, there is no warranty: Gilfert v. West, 37 Wis. 115; Bell v. Dagg, 60 N. Y. 528.

¶19In Strange v. Ellison, 2 Bailey (S. C.), 385, it is said:

The seller of a promissory note warrants “that the indorsements are genuine, unless it appears that the transferee took it without reference to that security, or had agreed to run the risk of the indorsement being not genuine.

“But, notwithstanding the general principle, it is equally certain that the contract of sale or transfer * # may be made … under such circumstances as to exclude the warranty of genuineness, which would otherwise be implied by law”: Straus v. Hensey, 7 App. D. C. 289.

“It seems to me it would be absurd to hold that on the sale of property any fact affecting its title, quality, or validity, which is distinctly disclosed and known to the purchaser, can be said to be warranted by implication not to exist”: Davis, Judge, in Curtis v. Brooks, 37 Barb. (N. Y.) 479.

¶20In 24 R. C. L., Section 455, it is said:

“A warranty of title is annexed by law to a sale of personalty only where there is nothing in the circumstances of the case to rebut that presumption.”

¶21This question was carefully considered by the Supreme Court of New York in Bank v. Gallaudet, 120 *499N. Y. 298, 308 (24 N. E. 994, 996), in which the court said:

"The question as to whether there was an implied warranty depends upon the facts as to whether the defendant was an agent and disclosed his agency to the plaintiff, or whether that fact was known and understood1 by its officers in making the purchase.”

¶22And the cases of Wilder v. Cowles, 100 Mass. 487, and Worthington v. Cowles, 112 Mass. 30, are to the same effect.

¶23There certainly was no written contract attached to such an indorsement in this state, independent of the statute, for the careful and deliberate decision of this court, formulated by one of the most eminent and learned of its judges, concurred in by a unanimous court, is to the contrary; and is in entire harmony with the general rule as shown by the authorities just quoted.

¶24In Carroll v. Nodine, 41 Or. 412 (69 Pac. 51, 93 Am. St. Rep. 743), Mr. Justice Wolverton said:

""Where the transfer is by -indorsement without recourse, or by delivery, the vendor’s liabilities arise from the fact or contract of sale, and not upon the paper. … Where an article of personalty in the vendor’s possession is sold and delivered to another, and nothing is said, there goes along with the contract an implied warranty of title, and a failure thereof renders the vendor liable. The implied warranty attending the sale of commercial paper arises upon like principle. * * But we have seen that such an indorsement does not constitute a contract in writing, and serves merely to transfer title, as in the case of delivery when payable to bearer. ’ ’

¶25It is urged that the above decision was rendered as to paper, dated prior to the passage of the negotiable instruments law, and that, although it was rendered *500three and one-half years after the passage of that act, yet that it had reference to the law as it was before, and not after, the act.

¶26Granted that this is so; what words shall we point to in Section 5898, or anywhere in the body of the act, upon which we can predicate a decision, that the act made the implied contract a contract in writing, where by the law-merchant and by our own solemn decision •there had been no contract in writing before. Where is the word or words that will bear that construction? I find none. Certainly the law does not say that the contract which it implies shall be a written contract. On the contrary, it is entirely silent in that regard, and leaves the contract to be implied from the transaction and not from any written words; just as it was implied from the transaction and not from any written words by the law-merchant, as declared by the authorities generally and by our own solemn decision. Not only is there no word in the statute saying that the contract shall be in writing, or treated as in writing, but all the terms of the act, when taken together, show that this was not the intention.

¶27Section 5871, L. O. L., provides:

“A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument.”

¶28Is it not perfectly clear that this language puts the indorser without recourse, in exactly the same position as one who assigns by delivery, or orally, or by a separate written .assignment upon another paper?

¶29Again, how can we say that the statute makes a distinction between the warranty by mere delivery, and the warranty by indorsement without recourse, when the statute actually couples them in the same phrase, and makes exactly the same warranty apply to both.

¶30*501Every person negotiating an instrument “by delivery or by a qualified indorsement,” warrants, etc.

¶31Whether or not Judge Wolverton, in writing the opinion in Carroll v. Nodine, 41 Or. 412 (69 Pac. 51, 93 Am. St. Rep. 743), had this statute in mind, and recognized it as declaring the law-merchant as it had previously existed, is it not plain that his language is just as applicable as though he had the statute before him and recognized the warranty of the indorser without recourse as just the same, and to be coupled with the warranty by delivery, just as the statute couples them?

¶32It follows that the statute of frauds does not enter into this case at all, because there was no written contract, in so far as a warranty was concerned, and the warranty mentioned by the statute is an implied warranty only, which exists without regard to the indorsement, from a mere sale and delivery of the note.

¶33There is no reason, then, why this implied warranty froten a mere sale of the article may not be changed or limited or abrogated by a parol agreement, either expressed or implied, just as fully and to the same effect that it could be done by a formal written agreement: Carroll v. Nodine, 41 Or. 412 (69 Pac. 51, 93 Am. St. Rep. 743).

¶34The warranty of the seller of a negotiable promissory note, who transfers the same by delivery or indorsement without recourse, is identical with the warranty of the vendor of any other kind of property, who, primarily, in all cases warrants the title to the same; but this warranty may always be overcome by direct or circumstantial evidence tending to show that there was in fact no warranty, but that the buyer took the title with knowledge and at his own risk.

¶35In a note to 62 Am. Dec., p. 463, it is said:

*502“In America the authorities are uniform to the point that on a sale of chattels … there is always an implied warranty of title, unless the circumstances are such as to show that the vendor was not selling as owner* * or that the purchaser was to take the risk of the title.”